If your pension remains in the UK, you may have UK tax obligations.
You could do better if you transfer your pension funds out of the UK.
Such a transfer into a Qualifying Recognised Overseas Pension Scheme (QROPS) requires qualified advice.
Here's an overview of your options...but if you have specific questions, don't hesitate to contact us and we'll help.
From 6th April 2006, the rules for UK pension schemes including; retirement annuity contracts, small self-administered schemes, self-invested pension plans, personal pensions and occupational schemes; have been consolidated under ‘Registered Pension Schemes’.
These come under either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.
If income is sourced in the UK, than non-UK residents are liable to pay UK income tax on those earnings as is the case for earnings of UK residents. If you have a pension in the UK, this is counted as UK source income and so you are taxed at your marginal rate on the 75% that is not included in your tax free sum.
However, a Double Tax Agreement (DTA) between the country in which you are resident and the UK can mean that you are exempt from UK tax – choosing instead to pay tax where you are resident.
A DTA exists between Canada and the UK pertaining to periodic pension payments from the UK. These payments are paid to the resident of Canada who is the benefiial owner of the pension and are taxable only in Canada.
Annuities are treated differently. Annuities are taxed in Canada if they arise from the UK and the owner or beneficiary is resident in Canada. Annuities might also be subject to tax in the UK. If the recipient of the annuity is the beneficial owner, then UK tax is capped at 10% of the taxable amount for Canadian residents.
Amounts that are non-periodic or of a lump-sum nature are not included in the DTA.
Government pensions have their own rules.
Signed in 1978, the DTA between Canada and the UK was updated as recently as 21st July 2014.
Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age. Passing pensions onto beneficiaries is now, in general, less costly. Marginal tax rates are still up to 45%.
Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die.
Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with Canada. UK income tax does not apply if the person has been non-resident for five years or withdrawals are below £100,000.
Inheritance tax does not apply in Gibraltar and you are protected from UK inheritance tax.
Gibraltar QROPS holders are protected from UK death benefit charges if the member is not, and has not been for 5 years previously, a UK resident.
A DTA exists between Malta and Canada meaning that annuities and payments providing a pension ‘in consideration of past employment’ are taxed in the country of residence only.
Maltese tax applies to periodic pension payments at a maximum of 15% on gross payments.
Annuities are subject to the same but lump-sums may be taxed above 15%. Lump-sums that result from cancellation, redemption, surrender, sale or other annuity alienation do not benefit from the 15% maximum. The 15% maximum does not apply to income averaging annuity contracts either. Malta income tax of up to 35% applies where the maximum does not. This includes QROPS providing non-periodic or lump-sum income.
UK income tax does not apply if the person has been non-resident for 5 years or more or withdrawals are below £100,000.
Inheritance tax does not apply in Malta and you are protected from UK inheritance tax.
Malta QROPS holders are protected from UK death benefit charges if the member is not, and has not been for 5 years previously, a UK resident.
Taxes are somewhat more complex for foreigners in Canada than in other jurisdictions (for instance Singapore).
What constituents residency?
In basic terms, residing or being ‘ordinarily resident’ in Canada constitutes residency. Residential ties are seen as the key measure for whether a foreigner should become a tax resident.
Key factors to consider in this include; location of dwelling place; residency (or location) of spouse or common-law partner and similarly for dependents. Residency is determined also by time spent within Canada in any given year. The minimum number of days is 183 in a calendar year. With the exception of Quebec, the provisions of the DTA override domestic residency.
Canadian residents are taxed federally and provincially. Income from worldwide sources including capital gains are assessed. Federal tax has a maximum level of 29% (25.75% in Quebec) with provincial taxes up to 10% or 25.5% depending on the territory or province.
Non-residents must pay tax on income sourced in Canada and from gains arising from property assets in Canada.
If the individual is resident in more than one country including Canada, the DTA rules will determine whether taxes are primarily levied in Canada or the partner country.
Pension income is categorised as taxable income. The exact wording referring to obligatory self-reporting for Canadian residents is “superannuation or pension benefit”. This incorporates any sum or payment from such plans or funds. No tax exemptions are made for pension payments in Canada except for one. This assists veterans and civilians for whom the pension is paid as a result of death or injury from war. They must have suffered death or injury in a country that was allied with Canada.
Whether the benefits of your pension result from your employment or activities before being a Canadian resident or not, your foreign pension will be included under “superannuation or pension benefit” and therefore taxed.
Some pension plans arising from occupational arrangements might be classed under the Retirement Compensation Arrangement which is subject to a 50% withholding tax regime.
Foreign personal pension scheme payments will normally be taxed as follows:
Annuity taxation is slightly more lenient where the scheme returns part interest and part return of capital as an annuity. This could apply to a foreign pension.
Lump-sums from foreign pensions are taxed at graduated rates without exception (e.g. for pre-commencement lump-sums).
Non-residents in Canada are not taxed on foreign pension income whether it be remitted or not.
Tax paid on the pension in a DTA partner jurisdiction can be claimed back as a tax credit if the individual is tax resident in Canada.
Tax-free transfer of one foreign pension to another is not provided for where the individual is a Canadian resident. They are still subject to tax in Canada. For Canadian residents, lump-sums paid out of UK pension plans into other foreign pension plans are taxed in Canada
Tax is levied in Canada only if the transfer of the pension happens after the individual has become a resident. Particular Canadian schemes may mean that Canadian taxes are levied even if the individual is not a resident. Once the tax has been levied on a pension transferred, it is not charged a second time so payments over and above that transferred only are taxed.
Being “exempt foreign trusts”, QROPS are normally not subject to Canadian taxes on growth. QROPS must be assessed individually to understand whether this applies.
‘Non-resident trusts’ include QROPS not classed as ‘exempt foreign trusts’. If the QROPS has a Canadian resident as a beneficiary or contributor, than it is taxed according to section 94. This means that the Non-Resident Trust is taxed on worldwide income just as a Canadian resident is.
Canada does not levy inheritance or gift tax but other tax may apply if the individual provides a gift whether during life or upon death.
In general, entitlements of periodic pension payment plans end on death. Tax, therefore, ends too. If a payment or lump-sum is paid out on death, it is treated as income and taxed accordingly. Where the payments continue to the surviving spouse, there is no impact on the payment resulting from the death – although it may be taxed at a higher or lower rate depending on the annual income of the spouse. Ensuring the payments continue to the spouse may involve extra steps in some situations.
Net wealth is not taxed in Canada.
Canada has more than 100 DTAs in place, including with the UK and Malta.
You have 3 main options:
1) Leave the Pension in the UK:
Canadian residents should not be subject to UK tax on periodic payments. Pension payments will be taxed according to the Canadian tax regime (from 39-50% depending on the province). Non-residents in Canada are not taxed on their UK pensions in Canada but these pensions would be taxed in the UK. Death benefit charges do apply to UK pensions.
2) Transfer to a Gibraltar QROPS:
For those members who have been non-UK residents for five years or more, transferring a pension to a Gibraltar QROPS means not being exposed to UK taxes on income of up to 45%. The member will pay 2.5% tax in Gibraltar and no tax in Canada for non-residents. Canada will tax residents’ payments at 39-50% as above. A foreign tax credit from Canada will ‘cancel out’ the 2.5% Gibraltar tax. The QROPS is not subject to inheritance tax in Gibraltar and it will also protect from UK death benefit charges. Canadian residents are subject to a tax on the transfer to the QROPS. No tax is levied on pension payments except for excess over and above the taxed transfer amount.
3) Transfer to a Malta QROPS:
Assuming the member has been a non-UK resident for five years or more, this option will ensure the pension is not subject to income tax (up to 45%) in the UK. Tax in Malta is capped under the DTA to 15% on periodic pension payments. Canada will also levy 39% to 50% tax depending on the province. The foreign tax credit will ‘cancel out’ the double taxation from Malta. Non-residents of Canada are not liable for Canadian taxes on payments. However, in this case, Maltese tax is due at up to 35%. The individual must pay in one country or the other. The QROPS is not subject to inheritance tax in Malta and it will also protect from UK death benefit charges. Canadian residents would have to pay tax on transfer to the QROPS but not on payments unless these are greater than the taxed transfer amount.
We believe the above taxation information is accurate, however tax rates and rules can change, and we are NOT tax experts. Therefore, please do not rely exclusively on the information to determine your liability for tax.
Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.
If you'd like our help with regard to your expat pension options, please get in touch and we will do all we can to help.
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